To split or not to split: Perceptions play big role

May 24, 1992|By Jeff Brown | Jeff Brown,Knight-Ridder News Service

If you sell baseball cards for a living, you know there's more to the business than cold, hard numbers.

Perceptions are important, too. And if your stockholders want their shares to sell for $20 instead of $40, well, who's to argue?

"Individuals and small investors generally like to buy stocks with prices of $30 or less," said Paul Goldin, chairman of Score Board Inc., the Cherry Hill, N.J., a marketer of sports memorabilia.

"They should realize it doesn't make very much difference. But there is a psychological threshold here: People think if a stock's at 20 it's easier to go to 50."

So when the price of its stock moved up to around $36 a share late last year, Score Board did what many other publicly traded companies are doing these days: It split the stock, turning every two shares into three.

The new shares were worth proportionally less, so stockholders didn't have any more value than they had before the split. But many liked the split anyway, Mr. Goldin said.

Like amoebas warming in a spring pond, stocks seem to have taken off in a rush of reproduction this year. One crumbly old certificate is joined by a fresh new one; now there are twice as many shares, each worth half as much.

It's too soon to say for sure that there will be a record number of stock splits in 1992. Historically, the greatest number of splits occurs in the second quarter as a sort of party favor handed out at annual meetings.

Still, many companies have announced splits in the last few months. And that would be expected, because splits tend to follow large increases in stock prices and many stocks reached record highs in 1991 and early this year. More than half of stock splits come when prices move into the $20 to $49 range, says the New York Stock Exchange.

Campbell Soup Co. of Camden, N.J., announced a two-for-one split in November. Tyco Toys Inc. of Mount Laurel, N.J., plans a two-for-one split this month, and Geriatric & Medical Centers Inc. of Philadelphia plans a five-for-four split this month.

Four stocks among the 30 in the Dow Jones Industrial Average have announced plans to split in the next couple of months. Walt Disney Co. will trade four shares for one, and Coca-Cola, Merck ** and Procter & Gamble will give two for one.

What's behind all this?

"The old story was always that companies split their stock because there was a certain [price] range that allowed their investors to trade in round lots," of 100 shares "and avoid the odd-lot extra commissions," said Averil Brent, an accounting professor at Columbia Business School.

"But I don't know if that holds these days. On the New York Stock Exchange, 80 percent of the stock is traded by institutions, and they don't have any trouble paying odd-lot fees."

In fact, she said, splits can increase costs for investors. In a trade worth $10,000, a typical broker would charge a larger commission if it involved 1,000 shares at $10 each than if it involved 100 shares at $100 each.

For most companies today, stock splits are prompted by public-relations considerations rather than a desire to provide a tangible benefit to shareholders, say observers.

But the danger is that the unsophisticated investor can get caught up in a stock-split fever, wrongly concluding that a split means a stock must climb in value, says John Markese, research director for the American Association of Individual Investors.

"A lot of people say, 'Hey, I hear this is about to split; it must be a good stock,' " he says. "What's really happening is the stock has gone up in price, rather than it's going to go up in price."

A 1980 study by the New York Stock Exchange found that three out of four individual investors believed a split represented an investment opportunity; one in three had considered buying a stock simply because of a split; and nine in 10 would hold their shares or buy more if a stock they owned underwent a split.

But institutional investors, who presumably are more sophisticated, "attach little importance to stock splits," the NYSE found.

The study compared stocks that split between 1964 and 1978 with those that had not. For a six-year period that began three years before a split and ended three years after, the average price of stocks that split grew 2 1/2 times as fast as the average price of non-splitters.

But the split itself doesn't cause improved performance, the professionals say. Rather, a split tends to be made by a company that has done well and, therefore, may continue to. Most of the growth in value comes before a stock splits, the NYSE found.

Although splits may bring little direct benefit to shareholders, companies feel they're a good marketing tool. Like the "new" label on a box of cornflakes, splits draw attention and suggest the product is better.

"Individuals look upon it as a vote of confidence in the company," said Score Board's Mr. Goldin. "So you want to make sure that when you split it, you don't screw up."

At Tyco Toys, management proposed the two-for-one split when the stock's price began to move out of the range of the competitors' stock.

"Our stock price is the highest of the toy companies," said Arthur Miller, vice president of finance.

The knowledgeable investor knows that Tyco's price relative to Mattel's is less important than comparative earnings and the company's plans for the future, but the amateur may see the cheaper stock as a bargain, the reasoning goes.

"You look for a popular trading range for your stock," agrees Len Grace, director of investor relations for Campbell's.

"What you're really trying to do is keep your stock in a price range that allows individuals to buy 100 shares," Mr. Grace said.

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